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GRAND RAPIDS — One of the only life insurance professionals in the state to specialize in the third-party evaluation of policy performance, Bill Boersma, principal of Lawson Insurance Services and its consultancy spin-off, Opportunity Concepts, has developed a unique industry perspective.

“In the life insurance market, and particularly when it comes to charitable planning, there is the good, the bad, and the ugly,” Boersma said.

It’s good, he explained, because life insurance is a fantastic tool for planned giving and creating endowments. He and his wife, both only 38-years-old, have created an endowment fund out of a large insurance policy they have on their lives.

“So, if we don’t live a long life and aren’t able to fund that foundation, at least there is going to be the life insurance policy to go in there and benefit the good causes that we care about,” he said. “And if we do, it’s a good diversification practice. Why put all your money into investments or all of it into insurance?”

Plus, relatively few individuals have the kind of assets it would take to create an endowment or make a large impact on a fundraising effort. For many would-be philanthropists, a life insurance policy might be their only opportunity to do so.

The problem that sometimes arises in today’s market is that policies don’t always perform as they are intended. Life insurance is based on current assumptions of interest rates and other market factors. If there is unexpected behavior in the market, such as incredibly low interest rates, the policy will not perform as intended.

Boersma has found this to be the case with many policies authored in the 1980s and early 1990s. Although they have rebounded slightly of late, interest rates fell dramatically through the past decade. A policy written with a 10 percent to 14 percent assumption in the late ’80s that has been earning 4 percent to 6 percent will fall dramatically short of its intended death payout.

“Very few people understand that, even in the insurance industry,” Boersma said. “Many of these policies are just falling apart.”

Working with insurance agents, attorneys, accountants and trustees, Boersma’s Opportunity Concepts reviews and analyzes life insurance holdings for use in business and estate planning. It has found an interesting niche working with nonprofits and charitable organizations — counting among its local clients a liberal arts college, a state university, a health care provider and community foundations.

Here’s the type of situation these groups hope to avoid: Mr. and Mrs. Jones give a large, “paid-off” policy to a hospital, expecting a million-dollar endowment in their name. Down the road, the hospital receives notice from the insurance company that the death benefit is not going to last unless premiums of $10,000 per year are paid in perpetuity.

According to Boersma, this is a relatively common scenario. Many policies are written with large premiums for a limited period of time, with the assumption that no other revenue will be necessary to sustain the policy.

“But what happens is, you have a policy you thought would have a million-dollar death benefit, but it turns out you only have a $50,000 value, and that it is tanking,” he said.

For both the donor and the charitable interest, this brings some difficult decisions. The donor could opt to fund the policy, as could the charity, if the audit determined it to be a worthwhile investment. More likely, the stakeholders will opt to divest from the policy. But there are other options available, including a specialty of Boersma’s firm: life settlements.

Still relatively rare in the West Michigan market, the practice involves the selling of policies on the open market. An investor, generally a large institutional fund, assumes the responsibility of making the premium payments, if necessary, and becomes the recipient of the death benefit.

The practice emerged from a much more controversial practice known as “viatical settlements,” which developed from the AIDS epidemic in the late 1980s and 1990s — when investors noticed that thousands of terminally ill patients were letting their policies lapse because they could no longer afford the premium payments. Patients with a term policy could sell the policy to investors for a lump sum, often as high as 60 percent of the death benefit. Those with a cash-value policy often chose to “viaticate” for payouts exponentially larger than the surrender option.

A life settlement, by contrast, applies to individuals with a life expectancy of 2-15 years, sometimes more. Boersma cited one recent case in which a private-industry client was a signature away from surrendering a policy for $10,000, but was able to get $500,000 on the open market.

This brings an incredibly lucrative option to the table for charities, not only in divesting from underperforming life insurance assets, but in wooing potential donors. If a donor were to sell a policy and donate the settlement, rather than give the policy itself, that would be worth a tax deduction equal to the settlement.

While audits are valuable to reveal the worth of existing charitable assets and options for realizing hidden value, Boersma believes a responsible organization should practice audits before even accepting a policy donation.

“They might not even want the policy,” he said. “It could turn out to be nothing more than a liability.”

In an extreme situation, he reasons that accepting junk policies could make the organization an unwitting party to tax fraud. Such a case could arise when a policyholder learns that a $5 million policy that was paid up after a decade of $40,000 annual payments now requires premiums of $400,000 a year and will only deliver a $1.9 million benefit. Boersma said he has seen situations where this has occurred, with the $5 million policy actually $2 million in the red. If the new premiums aren’t paid, that debt is forgiven, but the problem doesn’t end there: The IRS views forgiven debts as regular income.

“So the IRS sends you a 1099 for $12 million, and now you’re looking at paying $5 million in taxes on this deal,” Boersma said. “The first thing people think is, ‘Who do I give this to? A charity — they’re tax-exempt.’ Now, do you think that could be considered tax fraud? Do you think that could jeopardize their tax-exempt status?”

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